Credit, Collections & Insolvency News
Poorer households are hit harder than wealthy households when it comes to rising energy costs according to new research by Interactive Investor.
When factored into the other key areas of household expenditure, including food, housing costs (rent or mortgage) and transport, the research calculated that the poorest 10% of households face spending 26% of their budget on energy bills from April, or up to 37% of their budget if they have a big household or live in a larger home.
This is up from the current levels of 16% for poorer households in an average-sized house and 25% for low-income households in a larger home. Meanwhile lower income families in a small home will see their energy costs rise from 9% to 18% of their household budget in April.
People often moved into their current homes at a time when energy prices where more affordable and pensioners and larger families sometimes live in larger homes, despite having a limited income.
Middle income families will also see their energy costs soar and face spending 13% of their budget on energy bills from April, or up to 18% of their budget if they live in a larger home. This is up from 8% and 12% respectively. Meanwhile middle-income families in a small home will see their energy costs rise from 4% to 8% of their household budget in April.
In contrast, wealthy families have more financial wriggle room. The wealthiest 10% of households will spend 6% of their household budget on energy from April, rising to 8% if they live in a large home. Meanwhile, wealthy households in a small home will see their energy spending increase to 4% of their household budget in April, compared with 2% currently.
The calculations factor energy price projections by analysts Cornwall Insight and applies them to data on household expenditure from the latest ONS Family Spending Survey, which has been uprated in line with average wage inflation over the past year (6.4%).
The uptick is mainly driven by the increase in the maximum unit costs and daily standing charges under the government’s Energy Price Guarantee (EPG) from April from £2,500 per year to £3,000 per year for a typical home, and the loss of the £400 energy discount scheme which is set to come to an end at the same time.
Ofgem’s latest energy price cap, which is set to be announced on Monday (27th February 2023), is expected to remain above the government’s EPG cap from April, before falling to well below the £3,000 EPG level in the second half of 2023.
This would result in cuts in household bills as prices are capped by whichever is lower, the EPG or the price cap rate. Analysts Cornwall Insight say a typical bill will drop back to £2,153 in July.
Based on these forecasts, interactive investor calculates that the budget allocation to energy bills for the poorest household will fall to 13% for those living in small homes, 19% for medium-sized properties and 26% for large abodes,
Middle income houses could see their energy costs fall to 6%, 9% and 13% of household budget spend, respectively, while high-income households will continue to pay a small fraction of their budget on energy (3%, 4% and 6% for small, medium and large homes, respectively).
Myron Jobson, Senior Personal Finance Analyst, Interactive Investor, said “It is shaping up to be another awful April for households, with key areas of household expenditure set to rise. As households will no longer receive money off their energy bills from Spring, the upcoming increase to the government’s EPG cap will feel even more painful – especially for poorer households who spend a greater portion of their salaries on energy bills. Meanwhile, increases to council tax, broadband prices, mobile phone tariffs, water and sewage bills are set to pile on more financial misery.”
“Wholesale energy prices have fallen their peak back in summer 2022, but there has been an excruciating lag before these feed through to households. But households are set to have a glimpse at the light at the end of the tunnel come summertime, if energy prices fall back to a level which will make the EPG redundant.”
“Forecasted falls in energy bills could prompt a much-needed return of decent competition in the energy market, with competitive fixed-price deals overdue a comeback. However, suppliers might not be in a rush to offer more competitive deals, and any return of competition to the market is likely to be slow.”
“The easing in price rises can’t come soon enough for struggling households, The worst of the energy crisis could be receding, but there a still a long way to go before this once in a generation type bout of high inflation subsides. Even if prices fall in July as per Cornwall Insights forecast, they will still be almost 70% higher than in winter 2021/2022. Crucially, it is important to remember that annual bills are not capped – it’s the amount you pay for every KWH you use that is. As such, households which use more energy will pay more and the reverse is true for those which use less.”
“It remains important to pay extra attention to your financial wellbeing and consider what protective steps you can take now to avoid money worries later. If you are struggling to pay your energy bills, contact your energy supplier to ask for support as your first port of call. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all of your options.”
